The study of economic bubbles have arguably originated to the story of ‘Tulip Mania’, which was a period in the Dutch Golden Age during which prices for bulbs of the recently introduced tulip reached extraordinarily high levels. At the peak of tulip mania in 1637, you could buy a beautiful house on a canal in Amsterdam for one bulb. Then it collapsed, and you could buy ten bulbs for two dollars. It is generally considered the first recorded speculative bubble in economic history. Now today, higher educational institutions like Saint Mary’s College are teaching business students about the housing bubble of the US Great Recession, as well as the Stock bubble in the Great Depression and the Internet stock bubble of 2000.
Housing in the US economy prior to the 21st century would be considered distinctively as a durable asset, property that was long-lived and served many family generations. However, as the immigration, reproduction, employment and wage rates continued to rise, the demand of the household market began to follow. The benefits of owning a home rather than renting became a high incentive as the value of a household began to be seen as a profitable investment; household properties also began being seen as non durable assets rather than durable as housing flips and short sales became a factor in get rich quick schemes since the housing market continued to rise exponentially. Normally functioning housing market’s demand curves would usually slope downwards as the supply would slope upwards but during the expanding market, the demand sloped upwards while the supply also sloped upwards in which this self-reinforcing phenomena lead to extreme outcomes for all parties involved.
In normal household acquisitions, the potential home owner would consult with a mortgage banker usually designated by the mortgage broker of a particular property. The mortgage banker would then loan out the mortgages and aggregate these mortgage loans into Collateralized Debt Obligations (CDO) and sell these consolidated trenches of mortgage loans to outside investors as high quality assets with high yielding returns. Then unfortunately, with the consolidation of Wall Street Greed and the government’s desire to increase home ownership, subprime mortgages became widely available to incapable potential home owners. Many mortgage bankers began irresponsibly lending to unqualified home owners through an effort called ‘no income, no asset’ or “ninja” loans. This effort would usually involve falsifying the potential home owner’s annual income, this in turn gave mortgage loans to those who didn’t have the income to keep up with their mortgage payments and were forced to default or foreclose their home ownership.
Many of these foreclosures were still factored into these CDO’s and the high yielding payments of trenches began to subside. These lower grade CDO’s were then aggregated again into CDOs² in an effort to revitalize the slowly trickling housing mortgage loans but the outside investors lost a fortune and quit buying these investments; they left the mortgage firms with these deadening assets resulting in the subprime mortgage crisis which sparked the US Great Recession of 2007. Since the US deals with other countries, economies around the world began to collapse as the credit froze, and US banks needed to be bailed out by US tax payers. Majority of the mortgage bankers who were giving away these ninja loans weren’t prosecuted due to the fact that there were too many of them to jail. Almost everyone were contributing because it yielded a high returned quick sale, but the market eventually caught up to the mistake and we all took the bullet as a result.
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